You have the following information. At $t=0$a firm issues $$1,000$ of debt with an inter$-$

est cost of $20$ per cent, and $1,000$ shares wit$)$ a market value of $$1($i$.$e$.,p_0=$$$1).$ At

$t=1$ there are expected to be net cash flows $($before interest, dividends and depreciation$)$

of $$600,$ an ex$-$dividend share price $(p_1)$ of $$1\mathrm{.}20,$ and $5$ per cent economic depreciation.

i Calculate and explain:

a the EPS, dividends per share and capital gains per share;

$b$ the dividend yield;

c the earnings$-$price ratio; and,

d the $\frac{P}{E}$ ratio.

ii How is the $\frac{P}{E}$ ratio measured in practice, and why does it differ from the ideal

$\frac{P}{E}$ ratio?